PE Panorama: Is private equity losing its allure?

Is private equity losing its allure? That’s the talking point raised by a recent article in the Financial Times from Henny Sender – herself a veteran of private equity coverage in Asia and elsewhere. Her article title unapologetically claims that the “Best days of private equity firms could lie in the past”.

Is it so? Ms. Sender’s point, illustrated via in-depth reference to Steve Schwarzman’s (chairman of Blackstone Group) comments during the Blackstone Group’s April earnings call, is that stock markets are failing to recognise the full value of the listed private equity leaders with commensurate stock valuations, and are continuing to discount them relative to traditional asset managers and investment groups.

She instances three factors that may incline investors towards pessimism for the future of the asset class. One is potentially greater regulatory scrutiny of private equity firms, particularly on fees charged to portfolio companies. Another is private equity’s recent track record in global M&A, where it seems to be losing ground to the strategics. A third is the market in high-yield debt, which provides the leverage pool for leveraged buyouts (LBOs), but which may be topping out.

Analysts may be following these factors and discounting private equity giants because of them, but to me at least, that gives those analysts a little too much credit (no pun intended). I’d be happy if they did show such sound understanding of the mechanics of the private equity model, but in any case all of those factors sound just a little too far-out to account for current sub-par stock performance. I simply don’t believe that investors are factoring in those considerations when they award the current valuations that they do to private equity firms.

I also don’t believe that the public markets’ valuation of listed private equity groups in the US is an adequate measure of the performance and prospects of the global asset class. That at least puts me on the same footing as Mr. Schwarzman. I do believe that investors there have discounted the stocks of Blackstone, KKR, Carlyle, etc. through scepticism over the listed private equity model, and over these firms’ transition to multi-capacity multi-asset financial groups. That transition, don’t forget, was hatched in the pre-GFC era when the US private equity majors tried to cash in their winnings in the mid-2000s boom, in all kinds of ways. And when these groups did list, public markets investors were hardly unanimously enthusiastic in welcoming them to listed status.

Perhaps institutions have concluded that the best way to invest in private equity is – well, through private equity, rather than on the public markets. The asset class still seems to be delivering good returns there. But to parlay the problems of the listed groups into a structural challenge to the entire private equity model seems rather too big a leap.